1. Welfare effects of free trade in an exporting country Consider the Kenyan mar
ID: 1220507 • Letter: 1
Question
1. Welfare effects of free trade in an exporting country Consider the Kenyan market for lemons. The following graph shows the domestic demand and domestic supply curves for lemons in Kenya.
Based on the previous graph, total surplus in the absence of international trade is ______ million.
When Kenya allows free trade of lemons, the price of a ton of lemons in Kenya will be $800. At this price _____ tons of lemons will be demanded in Kenya, and ______ tons will be supplied by domestic suppliers. Therefore, Kenya will export _______ tons of lemons
940Domestic Demand Domestic Supply 870 800 730 660 590 No Trade Equilibrium Consumer Surplus . u 520 a 450 380 310 240 Producer Surplus 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Thousands of tons of lemons)Explanation / Answer
Without free trade, the Consumers Surplus is-1/2*250*(940-590)=43,750
Producers Surplus =1/2*250*(590-240)=43,750
Thus total surplus is 87,500
When Kenya allows free trade of lemons, the price of a ton of lemons in Kenya will be $800. At this price 100 tons of lemons will be demanded in Kenya, and 400 tons will be supplied by domestic suppliers. Therefore, Kenya will export 300 tons of lemons .
Consumers Surplus after trade-1/2*100*(940-800)=7000
Producers Surplus after trade-1/2*400*(800-240)=112000
Total Surplus=1,19,000
Thus the table
When Kenya allows for trade, the consumers surplus decreases by (43750-7000)=36750 and producers surplus increases by (112000-43750)=68250. The net effect of international trade is the increase in total surplus by (1,19,000-87500)=31500.
Before trade After Trade Consumers Surplus 43,750 7000 Producers Surplus 43,750 112000Related Questions
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